Foreign direct investment to fall, except in the Gulf

A 10% drop is predicted worldwide but presenter of UN report says UAE should fare better.

Foreign direct investment worldwide is expected to shrink this year as the financial meltdown hammers home, but Gulf countries are likely to buck the trend, according to a UN report released yesterday. Eckart Woertz, an economist at the Gulf Research Center (GFC) in Dubai - which presented the UN report - predicted that the world would see a 10 per cent decline in overall foreign direct investment (FDI) flows this year.

But he believed the UAE should fare better. "I am optimistic," he said. "You still need refining capacity, you still need oil." The emergence of sovereign wealth funds (SWFs) on the global scene had already dramatically altered the dynamics of large foreign investments, the UN report stated. The Gulf states, which are home to many of the world's largest SWFs, use them as a way to preserve and increase excess oil revenues. The report analysed 20 of the largest FDI deals done by SWFs since 1995. Out of the 20, 12 involved Emirati funds.

According to Mr Woertz, SWFs may begin to break with tradition by looking for appetising investments in the Gulf, after suffering considerable losses on investments in the West. If large GCC family-owned enterprises take a more corporate structure and eventually go public, then Gulf SWFs may find them very appealing targets for investment, he said. According to the GFC, the needs of GCC countries for large energy and construction projects along with legal reforms favourable to foreign investors are likely to keep foreign direct investment flows relatively strong in the near future. The unification of GCC customs and trade standards would also help, Mr Woertz said.

The UN report defined FDI as any stake taken in a foreign company which guarantees some control of the company's management - usually about 10 per cent ownership. The report, therefore, left out many of the largest investments made by SWFs in recent years, including the Abu Dhabi Investment Authority's (Adia) 4.9 per cent stake in Citigroup last November. The US comprised the largest individual share of global FDI, with 12.7 per cent of global FDI inflows and 15.7 per cent of outflows last year. The GCC, by contrast, claimed only 2.34 per cent of the global total of inflows last year, or US$42.9 billion (Dh158bn). FDI outflows for the GCC were $41.4bn, or 2.1 per cent of the global total.

However, Mr Woertz said that if all foreign investments were taken into consideration - including Adia's stake in Citigroup - the list of top foreign investors would look quite different. The UAE would number among the top 10, he said, along with countries like China, Saudi Arabia, Singapore, and Russia. The US, by contrast, would show a deep deficit. Although GCC countries make up a relatively small piece of the global pie when it comes to FDI, their share is growing rapidly, said Mr Woertz. Qatar's FDI inflows rose sevenfold last year compared with the year before, while Saudi inflows jumped nearly 10 times. The UAE's outflows dropped 30 per cent last year, following a string of unusually large purchases in 2006.